Guide to overpaying your mortgage

Making overpayments on your mortgage could save you more money than you earn from your savings, depending on the interest rate on your mortgage. Read our guide to what you need to know.

Making overpayments on your mortgage could save you more money than you earn from your savings, depending on the interest rate on your mortgage. Read our guide to what you need to know.

Daniel Evans
Mortgages expert
8
minute read
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Last Updated 7 FEBRUARY 2022

What is a mortgage overpayment? 

A mortgage overpayment is a payment you make in addition to the normal monthly payments required by your mortgage provider. Overpayments can be made in the form of a one-off lump sum or regularly through the year. Overpaying your mortgage means there will be less interest to pay so you can pay it off sooner and reduce the overall cost of your mortgage. 

For example, for some people who get paid an annual bonus or receive an inheritance, paying a lump sum off their mortgage can be a good option. Or you might choose to overpay your mortgage monthly, by paying more every month than is required. For example if your payments are £500 a month and you pay £575 – you’re overpaying by £75 each month. Even a few pounds extra every month can make a difference over the lifetime of a mortgage. Or you can do a combination of monthly overpayments and lump sums if that works for you.

Am I eligible to make mortgage overpayments? 

This will depend on your mortgage provider, your type of mortgage and the terms of the mortgage itself, so check what’s possible before you make a payment. 

So if you can, should you overpay your mortgage? That may depend on your type of mortgage. You’ll need to think very carefully about making overpayments if you’ve got an interest-only mortgage as it doesn’t have the same advantages as if you had a repayment mortgage. With a standard mortgage you can direct your overpayments to pay off the capital of your mortgage to reduce the amount you owe. Obviously with an interest-only mortgage that’s not possible and you may be better off directing your money towards your savings for your final capital repayment at the end of the term. 

If you’ve got a tracker mortgage or an offset mortgage you may be able to make unlimited overpayments without penalty – but make sure you check with your provider first.

How much can I overpay on my mortgage? 

Many lenders have a limit on how much you can overpay by each month or in a 12-month period – typically around 10% per year if you’re in a short-term, fixed rate period. Many providers will allow you to do this even if you’re in the introductory period of a fixed rate mortgage or discount mortgage

If you’re on a standard variable rate (SVR), you can usually overpay as much as you want. The downside is that SVRs are expensive, so at this point you might be better off remortgaging rather than overpaying.

Some mortgage lenders charge an early repayment charge (ERC), which can also apply if you pay off your full mortgage early. This is usually between 1% and 5% of the amount overpaid, although this can vary depending on the mortgage deal you have. So for example, if you have a mortgage of £100,000 which allows you to overpay a maximum of 10% a year this would be overpaying by £10,000. If you instead pay £12,500 and the early repayment penalty is 5%, you would be charged 5% of £2,500 – totalling £125 as a penalty. 

ERCs don’t mean that you shouldn’t overpay, but you’ll need to make sure that the savings outweigh any penalties. 

Always check the terms and conditions of your mortgage and speak to your lender before you make overpayments. 

Top Tip
If you want to overpay on a repayment mortgage, make sure the money goes towards paying off the overall balance, not just the interest. When you speak to your lender, tell them you want to use overpayments to reduce the term of your mortgage.

If there are no penalties, overpaying could help you save money in the long run. And you don’t have to overpay a large amount each time. Just £50 or £100 more each month could help reduce the interest you pay and shorten the length of your mortgage.

To see if you’re better off overpaying your mortgage or saving the money, you need to work out if your mortgage rate is higher than the rate on your savings, after tax. Bear in mind that up to £1,000 of the interest on your savings is tax-free. You’ll also need to take account of your overall financial situation too, so you may be wise to instead set up an emergency fund if you haven’t already got one.

Remember that if you’re not earning enough interest on your savings, you could be better off switching your savings account.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Should I overpay on my mortgage or reduce its term? 

If you can, overpay rather than ask your lender to reduce the length of your mortgage as this potentially offers you more flexibility with less risk. Both options have the same outcome – higher monthly payments, less interest and a shorter mortgage term. But if you’re locked into an agreement to pay regular higher monthly payments, you might find yourself struggling if your circumstances change or you’re on a variable rate and the interest rates rise. 

By overpaying you can vary the amount on top of your set payments each month, or even stop overpaying altogether if you need to.

Should I overpay monthly or as a lump sum? 

Whether you overpay the mortgage monthly or use a lump sum will depend on your own circumstances and what your lender prefers. Deciding on a set amount you are going to overpay regularly could help you budget. And if things change you can stop at any time. A lump sum could save you money on interest and clear your mortgage faster, but you won’t be able to get your hands on the money once you’ve paid it over. 

There may be some situations where you unexpectedly come into a lump sum – like receiving an inheritance – and paying a lump sum off your mortgage could be a good thing to do with your windfall. 

Some people compromise and pay the extra into a savings account – preferably a high interest regular savings account – and then (if they haven’t needed the money for an emergency) pay it as a lump sum into their mortgage. This gives additional flexibility, but will mean that you lose out on the difference between the interest being paid on the mortgage and coming in on the savings.

What are the advantages of overpaying on your mortgage? 

If you can afford it, there are a variety of benefits of overpaying your mortgage: 

You’ll pay less overall on your mortgage 

By overpaying you can reduce the capital you owe on your home, which in turn will mean you have to pay less interest, cutting the amount you’ll have to pay back over the lifetime of your mortgage. 

You can pay your mortgage off earlier 

You can become mortgage-free sooner, offering you more freedom and the chance to do something else with the money that would otherwise be spent on your mortgage. Even paying just an additional very small amount regularly could shave months of your mortgage term and potentially save you more on interest than you’d gain by putting your money into a low-yield savings account. 

The loan to value ratio on your home will improve 

By paying off the capital you’ll begin to own a larger proportion of your own home making the loan to value more favourable to you. If you decide to remortgage at a later date, it’s possible you’ll get a better deal as you’ll have more equity in your home. 

It can be better financially than saving 

If savings rates are low, you’ll benefit from the difference between the interest you save on your mortgage and what you’d get from your savings account. However, if the interest rate on your savings account exceeds the interest rate you pay on your mortgage you might be better off keeping your money where it is.

What are the disadvantages of overpaying on your mortgage? 

Overpaying your mortgage can have some disadvantages too, for example: 

You might have to pay early repayment charges or penalties 

Some mortgage lenders will apply early repayment charges, so check your terms carefully to make sure you won’t face a penalty for clearing your mortgage debt sooner. 

You may lose out by not paying other outstanding debts first 

It’s worth considering any other debts you may have and how much you pay in interest on those. If you have any unsecured credit, like high-interest credit cards or loans, they’ll usually come with a higher rate of interest than a mortgage. If you pay off the debt with a higher interest rate first, before you make any overpayments on your mortgage, it could help you save more overall.

You could overstretch yourself 

It’s important to bear in mind that you’ll lose the safety net of any savings you use to overpay your mortgage. In most cases, you won’t be able to dip into the equity of your home like you would a savings account if you face financial difficulties, like losing your job or an expensive repair on your home. Before you decide to overpay on your mortgage make sure you’ve got a rainy day fund that you can access at short notice if you need to. 

There are some flexible mortgages available, however. For example, offset mortgages, current account mortgages or 'borrow-back' mortgages will let you overpay, then withdraw the money again at a later date, without having to pay a penalty.

Should I overpay if I have an interest-only mortgage? 

You’ll have to weigh up overpaying an interest only mortgage very carefully as it has few advantages. With an interest-only mortgage any overpayments won’t be paying off the capital like it would with a repayment mortgage – this has to be paid in one go at the end of the term, So you won’t be reducing the amount owed, which means your overpayments will have little effect. Instead you might want to consider boosting whatever savings or investments you’ve chosen to meet your capital payment at the end.

How do I overpay on my mortgage? 

How to overpay your mortgage depends on whether it’s a lump sum or a regular overpayment. Give your mortgage lender a call to discuss your repayment options. They’ll be able to give you advice specific to your mortgage and confirm any limits. 

And if you want to start overpaying by a set amount each month, they should be able to help you set up a standing order. 

To maximise your savings, make sure your lender is aware that you want to overpay to reduce the length of your term by repaying capital. Otherwise, they might assume you want to pay off some of next month’s payment in advance – which is an option on some mortgage deals but won’t save you much in the long run. You need to clarify that any overpayments are going towards paying off your overall balance and not just the interest (which won’t reduce your mortgage term) as lenders won’t do this automatically.

Need mortgage advice?

Mortgages are complex financial products, so it’s important to take your time to find a great deal and consider your options.

We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice. Get in touch with one of their expert advisers here.

Go to L&C mortgages 

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
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Frequently asked questions

How will overpaying on my mortgage affect my loan to value ratio?

If you overpay your mortgage you will grow the share of your home that you own faster – increasing the equity you hold in your property which is the difference between the value of your home and the amount owed on the mortgage. 

If you have a lower loan to value ratio, mortgage lenders will see you as a lower risk if you are remortgaging and could potentially offer you a lower rate of interest. For example, if your loan to value is 80% you may be offered a lower rate than if the loan to value was 90%. This could further reduce your monthly payments allowing you to overpay more in future.

Can I overpay as much as I want?

If you want to know “How much can I overpay on my mortgage?” you’ll have to double check with your lender as it’s up to them depending on the terms of your lending agreement. Some mortgage lenders put a limit on how much you can overpay, especially if you’re in the introductory, fixed, tracker or discount period of your mortgage term. This is normally a set percentage of your remaining mortgage – often around 10% per year – but you should check the terms of your agreement. 

If you end up overpaying by too much, you’ll potentially face early repayment charges. This is usually worked out as a rate of the amount you’ve overpaid. Normally, the rate decreases the closer you get to the end of your mortgage term.

If you’re on the standard variable rate (SVR), your lender will usually let you overpay by as much as you want. But if you’re paying a high rate of interest on your SVR mortgage, you might be better off remortgaging.

Should I make an overpayment on my mortgage or put money in a savings account?

If the interest you earn on your savings account is higher than the interest you pay on your mortgage, it might be more beneficial to save. However, if your mortgage rate is higher, then paying off more of the mortgage debt might make more sense. The logic is that it’s better to save paying £3 in interest than to earn £2 in interest. And you’ll also have the added benefit of reducing the overall interest you pay and shortening your mortgage term.

When is the best time to overpay on my mortgage?

Ideally, you want to time your overpayments before the interest is calculated, to boost the amount you save. You should check with your lender to see when they re-evaluate interest rates. If the interest is calculated daily, then it makes no difference when you overpay. But if it’s applied monthly, quarterly or even annually, you should aim to overpay just before.

If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.

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